by Dr. Andrew D. Schmulow
Published electronically in The Sydney Morning Herald Online, 15 April 2016.
Synopsis: There are cultural and ethical malpractices in Australian banks which our regulations do not address, and which our regulators struggle to contain. We need to find solutions, and the FSI failed to address the problem. A royal commission would.
The Global Financial Crisis (GFC) started out as the subprime disaster. Understanding that is important later in the story. So, very briefly, here are the significant bits: a large industry developed around writing dodgy loans, sold using pressure-cooker predatory lending, by unscrupulous lenders – none more so than Bank of America’s Countrywide Financial.
When that was not enough, banks, including Bank of America, engaged in document fraud on an industrial scale (something Commonwealth Bank employees dabbled in too). Those dodgy loans were sold in baskets called CDOs. Those CDOs, like drops of poison, were sold in the hundreds of billions of dollars worth to banks all over the world. In that way market misconduct and malpractices in the US home loan market became the subprime disaster, which then metastasised into a financial firestorm that swept the globe.
Also published in The Age.